On September 13, 2013 the IRS changed the rules with Notice 2013-54 for Premium Reimbursement Arrangements (PRAs), Health Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs). The IRS in verbal comments, to clarify their position, stated they are stopping the pre-tax (tax-free) purchase of individual health policies by an employee, and employers without group health insurance or self-funded group health plans can essentially no longer have a Health Flexible Spending Account (Health FSA) or Health Reimbursement Arrangement (HRA).
PREMIUM REIMBURSEMENT ACCOUNT (PRA)
Definition: This is an account that allows employees to pay, on a tax-free basis, individual health insurance premiums.
Tax-free dollars are to be discontinued for the PRA starting with your plan year beginning on or after January 1, 2014. However, many employers are continuing the PRA even though dollars are no longer tax-free. On September 13, 2013 the Department of Labor (DOL) issued Technical Release 2013-03 and the Internal Revenue Service (IRS) released Notice 2013-54 simultaneously with the same information. This guidance provided information on many topics including the reimbursement of individual billed premium accounts on a tax-free basis through plans such as a Health Reimbursement Arrangement and Section 125 Cafeteria Plans. As plans renew on or after January 1, 2014, employers will no longer have the ability to offer premium reimbursement for individual health insurance policies on a pre-tax basis to its employees. In addition, employers may not contribute tax-free toward employees’ individual health insurance policies. The language in the technical guidance eliminates the opportunity for employers to use Health Reimbursement Arrangements (HRAs) and Cafeteria/Section 125 plans for pre-tax individual premium reimbursement. Employers may extend a benefit to employees on an after-tax basis as long as the arrangement qualifies for ERISA’s payroll practice exemption.
If you permit individual premium reimbursement, your plan documents must be updated to remove this provision.
Here are some reasons for keeping the PRA with after-tax dollars:
- The PRA is a valued benefit employees appreciate. Employers and employees can continue to credit the PRA with after-tax dollars, which assists employees with the purchase of their coverage.
- By continuing the deduction under the PRA, the participants will not have to worry about their insurance premiums being paid timely.
Action item: When your plan renews is when the after-tax PRA requirement takes effect.
Action item: Have payroll continue the deductions for the PRA but on an after-tax basis. This requires notifying your payroll software or provider.
Note: Employers need to be cautious by avoiding having this arrangement treated as an employer health plan. The voluntary plans safe harbor is available where (1) the program is voluntary (2) there are no employer contributions (3) the employer’s involvement is limited to forwarding the premiums and (4) the employer receives no compensation.
HEALTH FLEXIBLE SPENDING ACCOUNT (Health FSA)
Definition: This is an account or FSA that allows employees to pay, on a tax-free basis, their medical expenses from salary reduction contributions of up to $2,500 per year.
If your firm is not carrying a group health policy or sponsoring a self-funded group health plan, employees can no longer make pre-tax (tax-free) salary reductions for eligible 213(d) medical expenses through the Health FSA without running afoul of the ACA’s “insurance market reform” rules.
HEALTH REIMBURSEMENT ARRANGEMENT (HRA)
Definition: A health reimbursement arrangement is an account the EMPLOYER funds for medical expenses similar to the Health FSA, or for specific benefits that the health plan doesn’t cover. HRA reimbursements can also include premiums or contributions for health coverage. The HRA operates similarly to the PRA and is frequently used to provide retiree only benefits.
- Do you offer a stand-alone Health Reimbursement Arrangement to active employees? ACA insurance market reform rules, as interpreted by the IRS and DOL, indicate that an employer with a free-standing HRA designed to reimburse medical expenses incurred by employees (operating “like” a Health FSA) can no longer be offered after your current plan year ends.
- In addition, those HRAs that offer employer money to pay for individual health insurance (as distinguished from employer “group” coverage) are no longer allowed.
- HRAs are that are tied to or “integrated” with the group health plan are ALLOWED.
- Retiree only HRAs are allowed.
SUMMARY ACTION ITEMS
Step 1: Are you offering a PRA? If so, when your plan year renews, inform employees that their election for paid at home premiums is now taxed.
Step 2: Have payroll continue the deductions for the PRA but on an after-tax basis. This requires notifying your payroll software or provider.
Step 3: Are you offering a free standing HRA that is not working with your group health plan? If yes, then this benefit will cease when your plan year renews. Please inform your employees.
Step 4: For the Health FSA, are you offering a group health plan for your employees? If no, then the current regulations say that the health FSA is not a HIPAA “excepted benefit,” which means that employers cannot offer the Health FSA to employees without running afoul of the ACA’s insurance market reform rules.